## The Long Economic Hangover of Pandemics

## Source details

**Canonical URL:** [The Long Economic Hangover of Pandemics](https://www.imf.org/en/publications/fandd/issues/2020/06/long-term-economic-impact-of-pandemics-jorda)

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## Bibliographic details
- Authors: OSCAR JORDA, SANJAY R SINGH, ALAN M TAYLOR
- Published: June 1, 2020

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### Key findings on long-term macroeconomic effects
- Analysis covers 15 large pandemic events with at least 100,000 deaths, using newly available data on yields of long-term sovereign debt stretching back to the 14th century (Schmelzing 2020).
- Following a pandemic, the natural (after-inflation) rate of interest is tilted down by nearly 1.5 percentage points about 20 years later.
- It takes an additional 20 years for the natural rate to return to its original level.
- Compared with post–financial crisis episodes where real safe rates can be depressed for 5 to 10 years, pandemic effects are more persistent and long-lasting.
- Major wars show the opposite pattern: wars tend to leave real interest rates elevated for 30 to 40 years.
- Real wages respond to pandemics by rising gradually; about 40 years out, the real wage is about 10 percent higher.
- The historical pattern is consistent with the neoclassical growth model: loss of labor without parallel destruction of capital increases the capital-to-labor ratio, lowering returns to capital (interest rates) and raising real wages.
- Potential amplifiers of low interest rates after pandemics include increased saving by survivors—either to rebuild wealth or out of greater caution/uncertainty—and lack of needed investment.

### Interpretation and scenarios for COVID-19
- If historical trends play out similarly after COVID-19, secular stagnation would be a concern for monetary and fiscal stabilization policy for the next two decades or more.
- The authors assess at least three factors that will likely attenuate the decline of the natural rate following COVID-19:
  - The death toll of COVID-19 relative to the total population could be smaller than that of some major historical pandemics due to modern medical care and public health measures.
  - COVID-19 affects primarily the elderly, who are typically no longer in the labor force and tend to save relatively more than the young—a key difference from past centuries with shorter life expectancies.
  - Aggressive counter-pandemic fiscal expansion will boost public debt, reducing the national saving rate and possibly putting upward pressure on real interest rates.
- On net, the authors still expect a sustained period of low real interest rates, though attenuated by the three factors above.

### Policy implications and recommendations
- Sustained periods of low real interest rates create ample fiscal space for governments to finance stimulus measures to counteract economic damage caused by the pandemic.
- Low real rates should provide welcome fiscal room for governments to aggressively mitigate the consequences of the pandemic through counter-pandemic fiscal expansion.
- Policymakers should account for the possibility of prolonged low natural rates (two decades or more) when designing long-term monetary and fiscal policy frameworks.

### Comparative evidence and methodology notes
- The study takes a global view of macroeconomic consequences of pandemics across a number of European economies and uses long-run sovereign debt yield series to estimate responses of the real natural rate.
- The contrasting post-event patterns for pandemics versus wars support the neoclassical mechanism: pandemics → relative loss of labor → lower natural rate and higher real wages; wars → loss of capital → higher natural rate.
- Historical context includes pandemics going back to the Black Death in the 1300s and comparisons to the decline in interest rates from the mid-1980s to today.

*Source: The Long Economic Hangover of Pandemics — Òscar Jordà, Sanjay R. Singh, Alan M. Taylor, F&D Magazine, June 2020.*

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_Source: https://www.imf.org/en/publications/fandd/issues/2020/06/long-term-economic-impact-of-pandemics-jorda_